By Marc Deschenaux
We can legitimately wonder whether the traditional securities are equiped enough to answering the modern investor’s needs. Are not you fed up to invest in basket of securities or in the large 500 fortunate companies that are baskets of subsidiaries ?
Up to now, securitizing intellectual property only has meant using it as a collateral like David Pullman, the banker who has created and sold the Bowie Bonds, also known as Pullman Bonds. These bonds were asset-backed securities which used the current and future revenue from albums recorded by musician David Bowie as a collateral.
Imagine the possibility of investing selectively in one movie, one patent, one song, one book, or in one design you truly believe in. Imagine getting rid of most of the dark side human factor, like poor management or excessive spending… Would not it be great ?
Enters my invention: Intellectual Property Securities or “IPS” !
Intellectual Property Securities are Pass-Through Securities, also known as a Pass-Through Certificates or Pay-Through Securities.
An Intellectual Property Security security is a royalties’ stream backed by an intellectual property asset such as a movie, a patent, a song, a book, a design or any other registered intellectual property.
A servicing intermediary collects the royalties’ payments from the issuer and, after deducting a small management fee, remits or passes them through to the holders of the intellectual property pass-through security.
The term Intellectual Property Security relates to the transaction process of securitizing intellectual property. It involves one or more intellectual property assets. It originates with the licensee’s payments, which pass through a collecting society before being released to the investor.
Launching Movie Securities
The first type of IPS we intend to launch is a movie-backed certificate, in which the movie distributors’ and movie licensees’ payments pass through a collecting society before reaching investors.
An IPS like any pass-through is a derivative based on certain royalties’ streams and providing the investor a right to a portion of those royalties. The royalties’ streams arise from underlying assets, which can include any intellectual property assets as already mentioned above.
Composition of an Intellectual Property Security
Each security can represent from one single intellectual property asset to a large number of intellectual property assets in any combination.
When there is a number of intellectual property assets, these can be of different kinds like the portfolio of rights combined in a movie, including image rights, music rights etc…
Payments are made to investors periodically, corresponding to the payment schedules set in the movie licensing or distribution agreements.
Risks Associated with Intellectual Property Securities
The risk of default on the debts associated with the securities is an ever-present factor, as failure to pay on the debtor’s part results in lower returns. Should enough debtors default, the securities can essentially lose all value.
Another risk is tied directly to current interest rates. If interest rates fall, there is a higher likelihood that current debts may be refinanced to take advantage of the low interest rates. This results in smaller interest payments, which means lower returns for pass-through securities investors.
Prepayment on the side of the debtor can also affect returns. Should a large number of debtors pay more than minimum payments, the amount of interest accrued on the debt is lower. Ultimately, these prepayments result in lower returns for securities investors. In some instances, loans will have prepayment penalties that may offset some of the interest-based losses a prepayment will cause.
By Marc Deschenaux